Investors are expecting something abysmal. Could profits. that are purely rascally spark a rally?

By Ben Steverman

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With the change in the calendar, companies are busily compiling their end-of-year financial reports, and the truth is that no one is really sure the kind of they volition say.

Last fall’s financial crisis and steep downturn scrambled the expectations of analysts and investors. Weak third-quarter results left many executives unwilling to predict how the fourth-quarter celebration season or 2009 would gambler out. Economic data heighten fears of a thorough slowdown, moreover economists disagree on how bad conditions will get or at the sort of time a recovery begins.

Analysts be under the necessity made their guesses, however. According to Thomson Reuters (TRI), profits. for companies in the gross S&P 500 index are expected to decline 1.2% in the fourth quarter of 2008.

That might seem like a minor decline amid so much economic carnage and financial huddle. But consider that at the rise of the fourth quarter, earnings were expected to rise 46.7% from a year past.

The only conception earnings remain close to breaking even now is that the monetary sector is expected to manage a small profit after huge losses at the end of 2007. "Financials are actually going to help earnings," says Ashwani Kaul, Thomson Reuters mentor of research.

Outside of financials, there is plenty of housekeeping suffering in analyst forecasts. Consumer discretionary firms’ earnings are expected to fall 54%, reflecting the weak holiday season and a slowdown in consumer expenditure. Energy earnings should fall 17%, Thomson Reuters says, season industrials are slated to drop 18%, the materials sector to fall 66%, technology should be off 15%, and telecom should send down 14%.

Sectors like consumer staples, health care, and utilities should see single-digit profit increases whether or not analysts are correct.

But will the Street seers get it right this time? Conversations with professional investors and market strategists reveal a lot of skepticism.

"Nobody really believes ‘company X’ is going to win what the consensus forecast is," says John Buckingham, chief investment functionary at Al Frank Asset Management. He believes analysts are still overmuch optimistic.

Earnings reports from Goldman Sachs (GS) and Best Buy (BBY) in mid-December efficacy have been harbingers of how the emporium will repeat to earnings reports. Although both the investing. bank and consumer electronics retailer reported mixed results, the market reacted by the agency of sending their stocks rocketing higher by double-digit percentages.

At least in these sectors—hard-hit by the economic crisis and stock market sell-off—dire expectations might already be reflected in the stock cost, says Doug Roman, managing director and senior vice-president of PNC Capital Advisors (PNC). By merely beating the "worst case" scenario, Best Buy and Goldman actually impressed investors.

Expectations are very low in favor of fourth-quarter earnings season, says Richard Sparks of Schaeffer’session Investment Research. "Even grewsome news, if it’s not being of the kind which wicked as expected, might be seen as a positive," he says.

The traditional start of earnings season is the release of Alcoa’s (AA) report, scheduled for Jan. 12. It’s the first major company with a fiscal year ending Dec. 31 to report results.